Value Investing Has Finally Died

In today's episode, I need to start things off with an apology. Now, I make it a rule on my channel to never apologize to trolls and critics and different people that just want to tear you down. That's never been something I'll do and I'll I'll do in the future. But in this case, I feel it's necessary to apologize to these people. Now, I don't even know their name. Uh, these are just Tik Tok, a Tik Tok couple, and they made this video about their finance and investing that went viral. Let's go ahead and just take a listen to it. And I know trading sounds intimidating. Here's my strategy in a nutshell. I see a stock going up and I buy it and I just watch it until it stops going up and then I sell it and I do that over and over and it pays for our whole lifestyle. They go on to explain that this is how they make all their money and it's just such an easy thing to do. >> Um, if you're wondering how much you can make doing this, in this month I turned about 400 into 14,000 and in this month I turned less than a,000 into 20,000. And honestly, my favorite part about this isn't even the amount of money you can make, but just the fact that we don't have to go to a 9 toive job. >> Yeah, we can focus on things that we actually enjoy doing. >> Now, this video contains it all. It has dialogue with the couple, each of them having their little parts. They share how they're making easy money, seemingly just buying a stock as it goes up, selling it when it stops going up. They explain how it funds their entire lifestyle. And of course, they have the kicker that you can do it from home at ease and have your own schedule. it almost seems too good to be true. And when this video went viral, I of course gladly took the chance to mock it. And I mocked both of them for selling a dream, something that was unrealistic. All of it seemed worthy of mockery. And that is exactly what I did. I made fun of them in an episode in a reaction video. Now, today, I'm apologizing to both of them because apparently the strategy that they've described is the future of investing. They were just years ahead of their time pioneering this strategy and sharing it across social media for more awareness. This strategy of simply looking at whatever stock is going up and buying it is now mainstream. It's everywhere. It's the dominant strategy in 2026. So dominant that even respected fund managers, ones that have written books, ones that value investors have woripped from time to time are now embracing the Tik Tok strategy. The Tik Tok strategy of this couple. Again, I don't know the name of them. That strategy of course is momentum investing. And in many cases, momentum investing is born out of desperation. And right now, stock pickers are becoming desperate. When we look at some news here, I just will highlight a couple things that I'm seeing across the market. One of them is this article from Bloomberg saying that the AI rally has crushed stock pickers with just one in four beating the market. So, anyone that's investing outside of the index, according to Bloomberg, 75% of you are not outperforming the market in 2026. And this is much worse than usual. If we look at the data compared to the historical norms, this is where we're at. So, historically around 40 to 50, in some cases 60% of fund managers outperform the market. It's not bad. At least it's a coin flip or better. Many of them are actually creating alpha and outperforming. Many of them are underperforming as well. And what we see happening in 2026 is the performance continually going down against the S&P 500. Now we have today just 28% of fund managers outperforming the market. And adding insult to injury, the trend has been that they've been underperforming for years and it's been getting worse and worse. This is where we get desperation. This underperformance has caused massive destruction to many massive funds. One of them that we've highlighted previously was the Poland Capital fund. Pulling Capital lost $50 billion, over half their assets under management in a single year. And this is because they bet on all the wrong companies. While everybody was moving into the AI stocks, the semiconductors, the memory companies, they were buying the software companies, the Salesforces, and the Adobe's, the exact opposite trade. And that cost them dearly. Their flagship funds investments are down 45% from the peak of 2021. While the market's going through a bull run, Poland Capital has fired over half their staff. They've downsized the firm. They're dramatically changing their strategy. This has been outright destruction to their firm. But it doesn't end with Pulling Capital. There's many more examples we could cite of funds going through a stressful time as they're seeing the market run away from them. One example here is Terry Smith. Now, Terry Smith is somebody that I've talked about many times. He is a growth and quality investor. He also considers himself a value investor. He buys highquality companies. He calls them good companies. His whole motto is to buy good companies, to not overpay, and then to do nothing. Simply put, he wants to buy good companies at a reasonable price and just hang on through market volatility. That's been his motto up until now. After years of underperformance and mismanaging his fund, Terry Smith just released an investment letter going over the dynamic changes he's making to his investment strategy. As we dive into this letter of him informing investors on the changes that he's making, how he's now going to start resembling Tik Tok investing, Terry Smith starts off by saying that this letter is going to be longer than usual because we're going to outline some changes in the way that they're managing Fundsmith. He goes on to say that the fund is down 2.9% in 2026, which is not destructive. And to many investors, you'll think they're only down 2.9%. What's the big deal? Why are they panicking? Why are they changing anything? That's not super bad. That's not that's not like pulling capital, which is down 50%. While it's true that being down only 2.9% is not bad in isolation, this is not the first year that Terry Smith Fundsmith has underperformed. This has been a multi-year problem. He's mismanaged holdings for a long period of time. It's been about four or five years now of really bad performance compared against the index. And when you look at it comparatively speaking to his own benchmarks, their benchmarks up 14% this year. So that makes their funds underperformance about 17% year-to- date. It's a lot of money and a long time to wait if you're an investor in those funds. If you're an investor in Fundsmith, you're probably scratching your head asking yourself, why do I have Terry Smith managing my money? I'm just not doing as good as if I was investing in any of these benchmarks they're competing against. And many Fundsmith investors have asked themselves that they have redeemed the money. There's massive redemptions and that's why Terry Smith has been forced to sell a significant part of his fund. Assets under management are going down. When assets under management are going down, when you have multiple years of underperformance, that's what creates desperation. Carrie Smith is in a desperate position. multiple years of underperformance, assets under center management being pulled through redemptions, and now he's trying to make some changes. The first thing that he does is he outlines the problem. He says, quote, "And the boom surrounding AI, which have combined to produce a market dominated by momentum rather than any fundamental factors like profitability, returns on capital, and growth. In other words, the factors we focus on." Now, as he goes on, he continues to make the case that a big part of the problem here is the concentration into index funds and passive investments and that most investors now, most individual stock pickers are underperforming this year. And you can see momentum spiking to record highs even more than in 1999 leading up into the dot bubble. So he starts off building this case that investors that are ignorant or unwittingly investing in index funds are simply going up because of momentum and not because of solid fundamentals on companies. He also mentions that this momentum is at a 30-year high and more extreme than the late 1999 just before the dot bubble burst. As active fund performance continues to worsen, more people abandon it, producing a pernicious feedback loop. People want to invest where the money is going. They see that momentum is going up in AI stocks. So they take money out of other places and they invest in those those stocks. And that is definitely a true dynamic today. There's all other stocks. It doesn't really matter what the other stocks are doing. A lot of those have been flattish or down while most of the money flows is going into these momentum stocks. Now again those momentum stocks, the AI ones have real fundamentals. But it is accurate that this is a pernitious feedback loop that there is a lot of money flowing out of everywhere else into these AI stocks. So I agree with him on this point. He also says that index investing is not truly passive. He's citing different sources saying that in Barren they've changed the rules to allow SpaceX to be included into indices more quickly than usual. He says say you don't like active management and go to an index. Well, somebody's managing that portfolio which isn't the fund manager. It's the index provider. If the index provider changes the index, the fund has to change. So index funds are really trading desks. That is a dramatic overstatement. Yes, the QQQ has altered a few rules to let SpaceX in cuz SpaceX is a very unique situation. There's not many companies like SpaceX. So, it makes sense to change around a couple rules for that specific situation. By the way, S&P Global with the Dow Jones and the S&P 500 did not alter their rules. SpaceX is not in the S&P 500. So, he's actually picking which indexes to criticize. The S&P 500, which is the benchmark for the majority of the world and definitely within the United States, the biggest market in the world, they didn't change the rule for for that index of the top 500 companies. But this is a dramatically overstated criticism of indexes. They're not anywhere like a trading desk. Remember Terry Smith's competition here is the index fund and he is getting his butt kicked by index funds for multiple years. So he is essentially lashing out at his competition. So after bashing index funds and passive investing for a while, Terry Smith turns to his own fund and his own strategy in the adaptation thereof. And this is where things really start to fall apart because Terry Smith starts to embrace the very thing that he was just bashing a minute ago. He says, "We're particularly mindful of the motor racing maximum. In order to finish first, you must first finish. This emphasizes that endurance and reliability are just as crucial as speed in the 500 mile race." You might say, we would indeed say that is exactly what we are trying to do by focusing on investing in companies with good fundamental businesses and financial characteristics and at least reasonable valuations or better. He says, however, there is another factor at work here. fund flows. We run open-ended funds and you can and increasingly have been taking money out. We suspect mostly to join the exodus from the active to passive or possibly to invest in managers who profess that they understand quality better than we do. They may be right or they may just be closet momentum investors, which will be fine until it isn't. Terry Smith calls out the elephant in the room. You guys are taking your money out. you want to go to either passive investing or other fund managers that are are doing better than us. He says, however, there will be little point in being proven right about the dangers of passive or momentum investing after our fund has closed. Do you see the argument that Terry Smith is making here? The situation he's facing, he's not making an argument that's philosophically driven or ideologically driven. This isn't some investing highlight or concept that he's that he's outlining here. This isn't something that he would ever put in a book. This is a argument driven primarily out of desperation, out of necessity to survive. One that is a pragmatist argument. He's basically saying it doesn't matter if we're right, that momentum investing is bad if our fund doesn't live long enough, if we don't even survive long enough to have our companies prove out their case. Remember that in the short term, the market is a voting machine. In the long term, it's a weighing machine. What Terry Smith is saying here is our fund may be closed by the time it gets to the weighing. We may not even make it there because so many people are pulling their money out in the short term. In essence, he is forced to make decisions based on the voting of the market. Based on the voting, which is another word for the momentum, the pricing that's happening today is having a real fundamental impact on Terry Smith's business. investors see that today he's underperforming and today they're pulling money out of his fund. If this continues on for another couple of years, they may have to close the fund altogether unless they can reverse performance right now. They can't wait for intrinsic value. They can't wait for price to match the business fundamentals. They can't wait for the weighing machine of the market. They have to increase performance today at the demands of their investors. Now, while he outlines that their mantra, their whole motto has been to buy good companies and to not overpay and to do nothing. And he says that that's not changing. We're still going to do that. We're just going to make a slight tweak to that number three, the do nothing part. Now, he says this is a significant change. It's a one-time thing. This isn't going to become the norm. But in a market which share price moves of 33% per day for even large stocks are not uncommon, a buy and hold strategy can only work if you are not subject to flows. Unfortunately, Terry Smith is subject to flows and his investors are pulling their money out as fast as they can. Sticking to our current approach may well fall foul of the adage that the market can remain illogical longer than we can remain in business. You should therefore expect that we will be more active in the future. I still expect our turnover and its cost to be significant below that of most active funds, but it may well be higher than our historic average. We will take more account of momentum. Terry Smith doesn't want to do this. He would love to have permanent capital and just sit on his companies for the next 10 years. He would love to watch as the intrinsic value and the business fundamentals prove out his case. But he's watching everybody take their money out of his company. and he is forced into this decision. It's a desperate decision and it's one based out of practical need for survival. We want to look at both fundamental and share price in our investment decisions. In particular, we will be much less willing to deploy the timehonored technique of buying quality companies when they hit a glitch. Why is he not doing that strategy? Because when companies hit a glitch now, they don't just fall 10 or 15% or 20%. They can fall for months after months after months and seemingly never come back up. In the current momentum driven market, buying shares in companies which have hit a glitch is like trying to catch the proverbial falling knife. All we are getting is cut fingers as their downward share price spirals and exacerbated by the index momentum. He says we have no desire to hug the index, but they're going to be paying attention to momentum factors. So again, he he's kind of going back and forth saying momentum is an enemy. I hate it. This market's driven by momentum. It's going to end poorly, but I have to I have to do business with it. I have to shake the hands of momentum and say, "Look, I'm going to follow momentum in this market so that my fund can survive." This is one of the most compromised looks and openly conflicted letters I've ever seen. It's a fund manager outlining in real time the disadvantages of investing in a fund, one that has open cash flows. See, this is very different than having permanent capital. When I put money into my portfolio, the passive income fund or the story one, the ones that you've been following all along these years, that's my money. I have no debt. There's no time constraints. Nobody else can pull that money out. So, I can buy a stock like Meta and if it goes down, that doesn't matter. I can hold it for years and years. I can hold Costco for 10, 15 years. I can just hold the same companies and whether they underperform two years or five, it doesn't matter. I have no constraints. no conflictions. I have nothing that's pressing me to urgently change my strategy and therefore I can stick to whatever I feel is truly best. Terry Smith is openly admitting and outlining all the conflicts of interest, all the other motivations, all the problems with running an open-ended fund. You have to play the dance of the market. You have to have outperformance every single year. There's a very short time window of when your investors will allow you to underperform. And outside of that, they get very impatient. So he's doing this dance where he has one foot on the side of momentum, the other foot on the fundamental side criticizing momentum, saying it's bad, but we have to do it and here's why it's bad, but we're still going to do it anyway. Terry Smith's letter overall is very important and every investor should pay attention to it. Not because of the specific stocks that he's buying or selling. That's not the point here. The overall point is that this is a fund manager being very honest with the conflicts and the dynamics going on with the market. In order for massive funds that control billions of dollars to be able to survive, to fight another day, they must forego all the things that they talk about, all the stories that they tell in their books about buying companies because of intrinsic value and fundamental reasons, investing in them for the long term, and that the market's a weighing machine over the long term. They have to get rid of that. They have to scrap it. They need to survive today. In the next 20 years, it doesn't matter if their business dies because their fund is closed because everybody pulled out their money due to a couple years of underperformance. This is the overwhelming problem that exists in most funds. They do not have permanent capital. They have massive outflows and the investors in these funds chase whatever is performing best today, which reinforces the momentum that Terry Smith is talking about. While he is consistently criticizing momentum, portraying it as a devil, he's shaking the hand of that devil. This is a compromised position. And Terry Smith is honest about it. But he's not the only one facing this position. Every fund manager like Terry Smith that is subject to these outflows is doing the exact same thing. They know they need a business change. They know that they cannot stay in the socks that they want. They can't be patient. They must change today because survival is essential. The managers that don't change will have their funds closed because investors are changing around their portfolios and withdrawing money. The dynamic that Terry Smith points out where everything else is being sold because that's not exciting anymore and that money is being transferred into these exciting companies, that dynamic is being exaggerated extensively by fund flows. Again, managers aren't only doing this because these companies are exciting. They're doing this because they have to. they literally have to to survive, which is exaggerating the returns of some stocks while at the same time impairing the returns of others. And this is all temporary. Every time this happens, it's temporary. And I'd like to outline a counter example. Terry Smith throughout his letter outlines Warren Buffett and highlights the difference in Warren Buffett's structure of Bergkshire than Terry Smith's fundsmith. Bergkshire Hathaway had permanent capital. When we look at how Buffett behaved during a similar situation of having the market race up without him during a time of severe momentum, Buffett's reaction was very different than Terry Smith. Take a look at 1999, one year before the dot bubble. This chart shows two different lines. The red one is the S&P 500's price performance. The blue one is Bergkshire's price performance. And this goes from the end of 1998 to the end of 1999. So this is the leadup to the.com bubble. During this time period, you can see that Berkshire was down 22%. And the S&P 500 was up 19%. Now consider that Terry Smith is only down 2% and the market's only up 14%. So about a 17% difference between fundsmith and the market. Warren Buffett's down like 40 plus% over the market. He is getting crushed by the index. So Buffett was in a situation of deep underperformance, far worse than what Terry Smith faces today. Articles are being published on Barons. This one was published December 27th, 1999. What's wrong with Warren? It goes through examining their extensive underperformance. It was getting a lot of press. So of course with anyone that their whole goal is to outperform, like Buffett's was, this puts him in a precarious position. During his letter that covers 1999, Buffett says, quote, "The numbers on the facing page show just how poor our 1999 record was. We had the worst absolute performance of my tenure and compared to the S&P, the worst relative performance as well. Relative results are what concerned us. Over time, bad relative numbers will produce unsatisfactory absolute results." Buffett is a harsh critic of himself. Remember, Terry Smith is highly competitive, superdriven person, very competitive. Buffett is as well. Buffett does not like losing. He doesn't like underperformance. He says his one objective is capital allocation. What most hurt us during the year was the inferior performance of Berkshire's equity portfolio. And responsibility for that portfolio, leaving aside small pieces of it run by Lou. Simpson of Geico is entirely mine. Several of our largest investies badly lagged the market in 1999 because we had disappointing operating results. He says over time of course the performance of a stock must roughly match the performance of a business. That is Buffett outlining the voting machine and the weighing machine. Stocks must roughly match the performance of their underlying business. Despite our poor showing last year, Charlie Munger, Bergkshire's vice chairman and my partner, and I expect that the gain in Bergkshire's intrinsic value over the next decade will modestly exceed the gain from owning the S&P 500. So, not only does he say, "Yeah, we've we've done terribly this year. We're still going to beat the market over the next 10 years." He says, "We can't guarantee it technically, but we are willing to back our conviction with our own money." To repeat a fact you've heard before, well over 99% of my net worth resides in Berkshire. In this letter so far, Buffett highlights a lot of things. He makes no excuses about his underperformance. He takes full responsibility of it, even absolving other managers of the portfolio of any responsibility. He puts it all on himself. He says that his equity investments have fallen in price, which is not fun. He says his one and only objective is to outperform the market. That's the only goal of Berkshire, just to beat the S&P 500. He says that even though they're suffering dramatic underperformance in 1999, that he believes over the next 10 years they'll outperform by a meaningful amount. He doesn't abandon value investing, not even a little bit, not even a smidg. He doesn't say, "You know what, Charlie Munger and I have thought about it and we're just going to add in a little technical analysis into our underwriting of companies. We'll look at the operating cash flows. We'll focus primarily on the fundamentals, but we're going to add in a little momentum flavor in it as well, just to keep things going in the short term because people are getting concerned." He doesn't do that even a bit, not a pinch. Buffett doesn't care about the the momentum of the day. He doesn't care about the hype of the day. He realizes that market is going up without him to a huge degree. He realizes during this time period, every investor in 1999 believed value investing was dead. Buffett acknowledges all of that. He knows that investors have given up on value investing. They're chasing whatever is going up every single day. He's seen it before and he still sticks to his convictions that a company is worth its underlying intrinsic value and that's what it will ultimately trade around over time. He believes that momentum is a real factor that will work for a time until it doesn't. And that's what he continues to stick to in this letter. He warns that quote, "If investors expectations become more realistic, and they almost certainly will, the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated." Buffett says that he's not venturing into these companies, even though everyone says he's missing out on all this technology of the time. quote, "Even though we share the general view that our society will be transformed by their products and services, our problem, which we can't solve by studying up, is that we have no insight into which participant in the tech field possesses truly durable competitive advantages." He just didn't know which company was going to continue surviving and thriving after all this hysteria, so he stayed out of it. Buffett highlights that many people during the.com bubble claimed that they had the skill to accurately predict which companies would continue on with this momentum long after others have failed. He says, quote, "If others claim predictive skill in those industries and seem to have their claims validated by the behavior of the stock market, we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we'll have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it's almost certain that there will be opportunities from time to time for Bergkshire to do well within the circle we've staked out. Buffett is unwilling to alter his investment strategy, even a pinch, during 1999, during the time where Bergkshire faced more extreme pressure than any other time throughout their history. during the time of the worst absolute and relative performance against the S&P 500. He won't change a thing. He just keeps doing what he's doing. He finally signs off in this letter with a big warning. Meanwhile, if anyone starts explaining to you what is going on in the truly manic portions of this enchanted market, you might remember still another line of the song, "Fools give you reasons wise men never try." Now, you may say that Warren Buffett talks a big game. He's down talking momentum, saying that these people don't really know what they're doing. He's saying that his portfolio is going to outperform over the next 10 years. And how did that really work out for him? Well, we already showed this image showing the dramatic underperformance over this one-year timeline. If we zoom out just a bit further, we can see how things worked. Berkshire promptly raced back up in 2001 as the S&P 500 completely collapsed. Over the following six or seven years, Bergkshire made 24% gains while the S&P 500 made minus2. If we zoom out even further, the outperformance of Bergkshire over the following 10 plus years of which he specifically outlined they did in fact outperform the S&P 500 by a modest amount from 1998 to past 2013. Bergkshire returned 207% in price appreciation while the S&P 500 returned 67%. So Berkshire over double the performance of the S&P 500 following that letter. These two different money managers, Berkshire Hathaway with Warren Buffett and Funsmith with Terry Smith, highlight and contrast two different routes. One of them has permanent capital and can stick to his convictions during the most difficult times during market hysteria. He invests in what he knows. He continued to stick with great companies with good fundamentals that he knew the intrinsic value was durable and growing over time. Buffett and Munger remained patient, disciplined. Buffett has continually said that temperament is the most important ingredient in an investor. How you behave during emotional times in the market, during times of underperformance. Buffett proved his temperament over and over again. His partner at the time, Charlie Mer, has continually said that his specialty is patience. basically just being able to outweigh other investors, watching his companies intrinsically grow over long periods of time and not having to deal with the momentum of the day. Terry Smith is in a very different position. Even if he did have great temperament, even if he was highly patient, he is forced by market factors with the outflows of his fund to act today. To act in ways that conflict with his overall investing philosophy and what he's taught for the past two decades, what he's written in his book, his actions conflict with all of that, but for good reason. he must out of necessity to survive. And that's a lot of what's going on in this market. I believe right now the investors that are patient and stick with great quality companies that have good intrinsic and durable growing value will do well over the next 10 years. You don't have to outperform this six-month period. You don't have to have great performance year-to- date. If your if your portfolio is down 2% or 5% and the market's up 16%. The market has been driven by very particular factors. Factors that you don't have to be a participant of today. If you have good companies that grow earnings over time, your portfolio will grow over time. If you have the ability to have permanent capital, meaning that you're not in a rush to use this money and you can invest it for the next 10 years, you have the benefit of waiting. And value investing is not dead. In fact, the time periods historically when value investing looked the most dead and momentum investing was the most alive were the best times for value investors. Now, let's go ahead and move on to some news. Now, the first bit of news we get to is this bearish take on software companies. Starbucks is tapping AI to reduce reliance on Microsoft and IBM software. The coffee chain is building alternatives to Microsoft systems that track inventory and an IBM tool that manages maintenance. According to internal presentations reviewed by Bloomberg News, some of the Starbucks developed software could roll out by the end of next year pending the results of testing. So there's this whole debate. If you replace software like maintenance software or inventory software from Microsoft or IBM, you don't just replace it once and build software. Most of the problems with software come with updating it, keeping it technologically secure, patches, security, all of this. It's very difficult to keep software actually running on a month-over-month basis, not just building it the first time. So, what Starbucks is doing here is a bit of a test. They're saying that AI coding tools is allowing us to build comparable tools to Microsoft and IBM quicker, but we don't really know how cost-effective this will be. The company's reviewing quote every contract and service according to the presentation. In some cases, that includes building products to replace software that its engineers have to heavily tailor anyways. So, not only are they able to replace the functionality of some IBM or Microsoft software or other vendors, they're actually able to make it better and more customized with AI. And that could be a problem for Microsoft or IBM, this is like their big bare case playing out. Oh no, what if our big businesses that we always sell to, what if they don't really need us? What if they what if they can start building all this software on their own? Now, to put this in perspective, out of the $400 million or 500 million that Starbucks spends on software, this is going to equate to about 10 million this year. So, they're not cutting a lot of software spending, it's actually a tiny amount this year. But the the issue is the overall trend. What we're seeing here is more companies experiment with building their own in-house software, making it so that these B2B companies like Microsoft or IBM are going to have to compete not with just other software vendors. It's not IBM competing with a competitor. Now they're competing with the company itself in their internal tech team. And even though this likely is not going to replace Microsoft's core tools, so they're not going to replace Word or Excel or Teams. All of that stuff seems rather safe here. This does show the pressure that's being put on these software companies with some of the things that they had easy. Historically, Microsoft and IBM could easily sell this stuff cuz there's no chance of a company like Star Starbucks replacing it without AI coding tools. But now it seems like there's just a bit more pressure. So what I expect to see over time is more companies follow Starbucks lead. We'll see how successful this is. And I believe some of the products that these legacy companies have sold, the Microsofts and IBMs, some of their legacy products are likely to be more challenged. And I do believe this is going to be a continual theme throughout the next couple of years. Now next we get into the fail of the week, which this also has to do with AI. This is an incredible article going over a huge problem in higher education. Brown professor suspects majority of his class used AI to cheat. Now, to be clear here, Brown is the name of the university. I'm not randomly calling out the ethnicity of someone here, so I don't I don't want that to I don't need a comment about that. This is an Ivy League college. For the first time since he started teaching welfare and economics and social choice theory nearly two decades ago, the Brown University economics professor gave his students a take-home midterm this spring. So, this professor of this Ivy League school, Brown University, says, "Hey, you can take your test from home." And he advertised the class that way even before students signed up for it. And they received an unusually high amount of students in that class. Gee, I wonder why. I wonder why everybody's signing up for this class when they're advertising it as take-home tests. Well, of course, the students are thinking, "This is going to be easy. Take-home tests means that I can easily find the answers at home as I take the test, right? That's what these students are thinking." Now, he says he knew something fishy was going on. And so, he and his graders ran the test through Chat GBT. The AI gave answers that mirrored what his students had written and which were quote kind of correct but very off and very convoluted style. Srano said that for example one question asked students to prove a mathematical statement that could most obviously be done using a direct argument. Serrano explained that Chachbt and many of his students used a contradiction argument which gave the right answer but was very contrived. In a message to the students after the midterm that he shared with insider higher ed, he wrote them all that he suspected that they were using AI to cheat. And with the blessing of his dean, he changed the final exam to be an in-person test. Imagine you you join this class. You think it's going to be all at home testing. So, you're like not even paying attention. Who cares? You're just going to plug it all into CHACBT. This is the game plan. and you take the midterm, you plug it all in the chatbt and you get like a 95% on the test. Awesome. Easy A. My GPA is going to go up. This is great. And then afterwards, he says, "Hey, we know that you all used AI, so we're going to do the final uh in person." Uh-oh. Now you wish you had paid attention in the class. Now you wish you actually were learning stuff, you know, going to college and learning things. Now you wish that that part was happening. 18 of the students subsequently dropped the class. Nine students remain enrolled but did not take the final exam. Srano said the results proved him right. Three stu three students earned a zero. A zero. And the average score was 48.6% by far a historic low. What is the point? I mean really what is the point of spending years of your life going to a university if you're just going to plot in questions to chatbt and throw in the output in the test? There is there's no point. You might land a better job with a college degree. That's not a guarantee. This is a serious problem for universities. If there's ever the chance to cheat with AI, the majority of students are going to do it. That's what this illustrates. Even at Ivy League colleges, the the smartest students, they're going to become very lazy. They'll take the easiest road. They'll cheat if they can do it. The only way that I see colleges surviving now, universities actually adapting, is having basically every single exam, every test in person where they can be monitored. That's the only way that you can test that students are actually learning. Cuz right now, higher education, I it's just people asking questions and answering a chatbt and back and forth. That's all it is. Nobody's learning anything. If you just take a random question, you throw it into chat GBT and you paste an answer, there's no point in doing it at all. And that is why it is the fail of the week. That's all for now. Hope you enjoy your day.